For many individuals, college education is seen as a steppingstone to opportunities and career advancement. However, the price to pay for the college education can present a financial barrier caused by rising costs of tuition, textbooks, and living expenses. To break through this barrier, many often use student loans to finance their education. Today we will investigate the intricacies of student loans surrounding the types of student loans, and important considerations surrounding them.
First, let’s go over what a student loan consists of. The first thing to look at is the principal amount. This is the initial sum of money borrowed to cover educational expenses, such as tuition, fees, books, and living expenses. For example, let’s say you borrowed $100 then the principal amount would be the $100 that you borrowed.
Second, is the interest rate which is the cost of borrowing money. For example, if your interest rate was 10% than 10% of the $100 you took on loan would be added to your final balance to pay. For federal student loans, the interest rates are set by the government, while private loans may have variable rates based on creditworthiness of the borrower.
So, what differentiates a loan from a student loan? A loan can be used for any financial expense that the borrower chooses. A student loan is a loan that is used for the purpose of education expenses that include tuition, dining, books, and any financial expense surrounding a student’s education.
Each student is offered a certain amount of loans based off their financial background. To access and figure out how much is available you must fill out a FAFSA (the Free Application for Federal Student Aid). The FAFSA, which is filled out annually, grants students access for their financial aid. You can access the FAFSA here and start working on your application. Since most student’s interested in financial aid look to federal loans, let’s look specifically at that. Federal student aid is a safe and popular way to go about funding higher education. This is due to the many safety nets and financial flexibility surrounding student aid that have been put in place. An example of this is within federal student loans having deferment (the postponing of payments) until six months after graduation. This allows students to not have to start making monthly payments until they have graduated college full-time. There are several types of student aid that a student can pull.
- Federal Grants: Grants are financial awards that are given by the U.S. government to help financially fund student’s education. These grants are given out to students based on their financial need and determined by the FAFSA form. Think of them as a loan that you received but don’t have to pay back. These are best forms of financial aid that you can receive, and most students accept them in full when given one.
- Subsidized Federal Loans: These are the next best form of financial aid. These loans are offered by the federal government and do not add interest to the balance of the loan while the loans are in deferment. Instead, the government pays the interest while the student is in school. This allows the student to only pay the principal amount that they were loaned.
- Unsubsidized Federal Loans: The third form of financial aid are unsubsidized loans. These are loans taken from the federal government that add interest while you are in school. The difference between unsubsidized and subsidized loans is that the government doesn’t cover the cost of interest on these loans. This means that the amount borrowed will increase with compounding interest while the borrower is in school.
- Parent Plus Loans: A Parent PLUS Loan is a type of loan available to parents of dependent undergraduate students to help finance their child’s education. Unlike other federal student loans that are taken out by students, Parent PLUS Loans are borrowed by the parent on behalf of their child. The problem with these loans is that they come with higher interest rates, on average, which are to be covered by the borrower.
Whatever loan you may choose to take out in the future, remember that a large responsibility comes with these different forms of financial aid. Here are some tips when borrowing:
- Make sure you’re only taking out the amount that you need to pay for your education expenses. It’s tempting to take the full amount given, but that exposes you to unnecessary risk and interest rates.
- Make sure to read the terms of the financial aid beforehand.
- Make sure you understand what type of financial aid you’re signing up for and understand the interest rates, payment plans, and deferment periods it offers.
- Create a budget that considers loan budgeting and allows you to manage your finances more effectively.
When it comes to paying off a student loans its first important to know who your servicer is. A servicer is the company who you will be paying off your loan too. You can figure this out through your Studentaid.gov account under my aid tab where it will give you the name of your servicer. After figuring this out it’s time to select a payment plan based off what fits you best. There’s a multitude of different payment plans and figuring out which one suits your lifestyle best is key. If you need a better visualization of what paying off these loans could look like use this Loan Simulator repayment which will help give you a better visualization.
Student loans can be seen as a very complex and scary world to walk in, but being able to understand how loans work, where to find them, and the different types of loans will allow you to make more informed decisions when it comes to using a loan.
If you still have any questions or concerns surrounding student loans or creating a budget feel free to schedule an appointment with Powercat Financial. We can help by giving you a stronger understanding of student loans, figure out how much you need, and give you more financial confidence. You can sign up through your Navigate or through our website.
Drew Cason
Peer Counselor I
Powercat Financial
www.k-state.edu/powercatfinancial
